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If you suffered losses and would like a davenport investments ii llc formation consultation with a securities attorney, then please call Galvin Legal, PLLC at Rule is composed of three main obligations: reasonable-basis suitability, customer-specific suitability, and quantitative suitability. Galvin Legal, PLLC is a national securities arbitrationsecurities mediationsecurities litigation, securities fraud, securities regulation and compliance, and investor protection law practice. First Name required. Last Name required. Phone Number required.

Investment related expenses deductible for agi forex trading timetable

Investment related expenses deductible for agi

Taxpayers that can elect out of being considered a trade or business include real property trades or businesses 38 and certain farming businesses. Adjusted taxable income means taxable income, disregarding: Adjusted taxable income also takes into account any other adjustments as provided by the IRS.

Assume that none of the exceptions apply, so the taxpayer is subject to the limitation on the deduction for business interest. As the table "Calculation of Business Interest Deduction" below reveals, the taxpayer has:. If the taxpayer uses the ADS to depreciate the real property used in its trade or business, the taxpayer can elect out of the business interest limitation.

Example Assume the same facts as in Example 11, except now the taxpayer is an automobile dealer. Personal interest, also called "consumer interest," is not deductible. Consumer interest is any interest that is not qualified student loan interest, qualified residence interest, investment interest, business interest, or passive activity interest, and interest on unpaid estate tax for the period of an extension under Sec.

Consumer interest includes the following:. Example For the year, a taxpayer paid the following interest:. Since none of this interest falls under any of the exceptions to consumer interest, the interest is not deductible. If taxpayers use debt proceeds for more than one purpose e.

Example On Nov. Taxpayers and their advisers need to understand the new rules covering the deductibility of business interest, investment interest, and personal residence interest. In addition, tax professionals need to be aware that these rules are currently set to sunset after but may be extended beyond that date. Because of the increase in the standard deduction and changes to itemized deductions e.

In the past, many taxpayers were advised that debt related to their residence acquisition indebtedness and home - equity indebtedness was better than other types of personal debt because of the income tax benefits from the deductibility of interest related to home mortgages. Moving forward, many of these taxpayers will no longer itemize, making it likely that the interest rate will be the only consideration when making these choices in the future.

However, if the rules do sunset after , debt related to a taxpayer's residence will regain its importance. This provision expired at the end of , after being retroactively reinstated by the Bipartisan Budget Act of , P. Floor plan financing interest is interest on floor plan financing indebtedness, which is indebtedness used to finance the acquisition of motor vehicles, boats, or farm machinery for sale or lease and secured by the inventory acquired with the proceeds of the indebtedness Sec.

The January issue marks the 50th anniversary of The Tax Adviser , which was first published in January Over the coming year, we will be looking back at early issues of the magazine, highlighting interesting tidbits. This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID Toggle search Toggle navigation.

The five primary types of interest for individual taxpayers are student loan interest, qualified residence indebtedness interest, investment interest, business interest, and personal interest. The law known as the Tax Cuts and Jobs Act temporarily introduced new rules for years after for qualified residence indebtedness interest, investment interest, and business interest. For years after , investment expenses are no longer deducted in calculating net investment income for purposes of determining the deduction for investment interest.

Business interest in excess of the limitation can be carried forward indefinitely. When debt proceeds are used for more than one purpose, the interest on the debt must be allocated in the same manner as the debt proceeds are used. In the context of individual income tax, most interest can be classified as one of five types: Qualified student loan interest; Qualified residence interest; Investment interest; Business interest; and Personal consumer interest. Department of Education student aid program.

In calculating the student loan interest deduction, qualified education expenses must be reduced by, among other things: 5 Nontaxable employer-provided educational assistance benefits; Tax-free scholarships; and Veterans' educational assistance benefits. Qualified residence interest Home mortgage interest on a qualified residence 10 is deductible from AGI as an itemized deduction.

Investment interest Investment interest is any interest that is paid or accrued on debt allocable to property held for investment. As noted above, because miscellaneous itemized deductions are not deductible in , no investment expenses are deductible. There is no excess of investment interest over net investment income to be carried forward to Business interest Taxpayers can deduct business interest, which is interest paid or accrued on indebtedness properly allocable to a trade or business other than the trade or business of performing services as an employee.

Adjusted taxable income means taxable income, disregarding: 40 Any item of income, gain, deduction, or loss that is not properly allocable to a trade or business; Any business interest or business interest income; The amount of any Sec. Personal consumer interest Personal interest, also called "consumer interest," is not deductible. Consumer interest includes the following: Interest on car loans unless the taxpayer uses the car for business ; Interest on federal, state, or local income tax; and Finance charges on credit cards and revolving charge accounts, the balances of which are incurred for personal expenses.

Allocation of interest If taxpayers use debt proceeds for more than one purpose e. The taxpayer uses the loan proceeds as follows. On Nov. For more information about this article, contact thetaxadviser aicpa. Latest News. Latest Document Summaries. Featured Articles. Most Read. It covers and focuses on the U. Key concepts covered include gross income and items that are statutorily included or excluded in it, personal and business expenses that qualify as tax deductions, and the differing tax treatments for employees versus self-employed taxpayers.

If you have enjoyed this course, consider enrolling in our online graduate Accounting program. Try an open course or two, then apply for admission into the credit-bearing version as you may be eligible to take credit-bearing courses during the application process. Completed on September 5, - excellent introduction course that can lead to a Coursera Certificate titled "U. Federal Taxation Specialization" sponsored by the University of Illinois.

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We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Articles. File Taxes Separately! Income Tax Net Income vs. Partner Links. A tax-deferred savings plan is an investment account that allows a taxpayer to postpone paying taxes on the money invested until it is withdrawn in retirement.

Tax Deductible Interest Tax-deductible interest is a borrowing expense that a taxpayer can claim on a federal or state tax return to reduce taxable income. Types of interest that are tax deductible include mortgage interest, mortgage interest for investment properties, student loan interest, and more. A traditional IRA individual retirement account allows individuals to direct pre-tax income toward investments that can grow tax-deferred.

What Is a Tax Benefit? Tax benefit is a broadly encompassing term that refers to some type of savings for a taxpayer. Investment expense deductions can include accounting fees, legal fees, fees for automatic investment services, fees for investment advice , and safe deposit box costs.

Once you've totaled up all your expenses, subtract that figure from your income and you'll have your net investment income. Taxpayers can elect to include qualified dividends and net capital gains in the calculation of net investment income for the year for the purpose of deducting investment interest.

This election is accomplished by choosing how much of your qualified dividends and net capital gains you want to include in net investment income on line 4 g of Form This election must be made on a "timely filed" tax return—that is, a return that's filed by Tax Day or the extended due date for the year, if you requested an extension. Taxpayers can amend a previously filed return to make this election within six months of the original due date. After it's made, the election can be revoked only with the consent of the Internal Revenue Service.

Investment expenses are a deduction on Schedule A of Form You may have to include Form as well. You can deduct all your investment interest if you meet all three of these qualifications. Itemizing or claiming the standard deduction for your filing status is a choice—you can't do both.

Therefore, itemizing only makes sense if the total of all your itemized deductions exceeds the amount of the standard deduction that you're entitled to claim. The TCJA increased standard deductions significantly, so this might be a high hurdle to clear. If the total of all your itemized deductions isn't more than your standard deduction, and you still choose to itemize, then you'll end up paying more income tax than you would otherwise need to.

Internal Revenue Service. By Full Bio Follow Linkedin. Follow Twitter. He worked for the IRS and holds an enrolled agent certification. Read The Balance's editorial policies. Reviewed by. Full Bio. Lea D. Professionally, Lea has occupied both the tax law analyst and tax law adviser role.

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To figure your deduction, add all casualty or theft losses from this type of property included on Form , or Form You can deduct the federal estate tax attributable to income in respect of a decedent that you as a beneficiary include in your gross income. Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that wasn't properly includible in the decedent's final income tax return.

Generally, a deduction is allowed for fines and penalties paid to a government or specified nongovernmental entity for the violation of any law in the following situations. You must report the full amount of your gambling winnings for the year on your Schedule 1 Form or SR.

Gambling losses include the actual cost of wagers plus expenses incurred in connection with the conduct of the gambling activity, such as travel to and from a casino. You can't deduct gambling losses that are more than your winnings. You can't reduce your gambling winnings by your gambling losses and report the difference.

You must report the full amount of your winnings as income and claim your losses up to the amount of winnings as an itemized deduction. Therefore, your records should show your winnings separately from your losses. Diary of winnings and losses. You must keep an accurate diary or similar record of your losses and winnings. In addition to your diary, you should also have other documentation.

You can generally prove your winnings and losses through Form W-2G, Certain Gambling Winnings; Form , Statement by Person s Receiving Gambling Winnings; wagering tickets; canceled checks; substitute checks; credit records; bank withdrawals; and statements of actual winnings or payment slips provided to you by the gambling establishment.

For specific wagering transactions, you can use the following items to support your winnings and losses. These recordkeeping suggestions are intended as general guidelines to help you establish your winnings and losses. They aren't all-inclusive. Your tax liability depends on your particular facts and circumstances. Copies of the keno tickets you purchased that were validated by the gambling establishment, copies of your casino credit records, and copies of your casino check-cashing records.

A record of the machine number and all winnings by date and time the machine was played. Table games twenty-one blackjack , craps, poker, baccarat, roulette, wheel of fortune, etc. The number of the table at which you were playing. Casino credit card data indicating whether the credit was issued in the pit or at the cashier's cage. A record of the number of games played, cost of tickets purchased, and amounts collected on winning tickets. Supplemental records include any receipts from the casino, parlor, etc.

A record of the races, amounts of wagers, amounts collected on winning tickets, and amounts lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack. A record of ticket purchases, dates, winnings, and losses. Supplemental records include unredeemed tickets, payment slips, and winnings statements. If you use a part of your home regularly and exclusively for business purposes, you may be able to deduct a part of the operating expenses and depreciation of your home.

You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively:. As a place to meet or deal with your patients, clients, or customers in the normal course of your trade or business; or.

In the case of a separate structure not attached to your home, in connection with your trade or business. The regular and exclusive business use must be for the convenience of your employer and not just appropriate and helpful in your job. If you have more than one place of business, the business part of your home is your principal place of business if:. You use it regularly and exclusively for administrative or management activities of your trade or business, and.

You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Otherwise, the location of your principal place of business generally depends on the relative importance of the activities performed at each location and the time spent at each location.

You should keep records that will give the information needed to figure the deduction according to these rules. Also keep canceled checks, substitute checks, or account statements and receipts of the expenses paid to prove the deductions you claim. These losses are deductible as theft losses of income-producing property on your tax return for the year the loss was discovered. You figure the deductible loss in Section B of Form See the Form instructions and Pub.

See Repayments in Pub. You may be able to deduct, as an adjustment to income on your Schedule 1 Form or SR , or Form NR, attorney fees and court costs for actions settled or decided after October 22, , involving a claim of unlawful discrimination, a claim against the U. Government, or a claim made under section b 3 A of the Social Security Act. However, the amount you can deduct on your Schedule 1 Form or SR , or Form NR, is limited to the amount of the judgment or settlement you are including in income for the tax year.

A retiree who contributed to the cost of an annuity can exclude from income a part of each payment received as a tax-free return of the retiree's investment. If the retiree dies before the entire investment is recovered tax free, any unrecovered investment can be deducted on the retiree's final income tax return. However, see Schedule 1 Form or SR , later. As described earlier in Unreimbursed Employee Expenses , there are four categories of employees who can claim deductions for unreimbursed employee expenses.

Employees in the following categories can claim their unreimbursed employee expenses. If you have deductible employee business expenses, you must usually file Form You are a qualified performing artist claiming performing-artist-related expenses. You are a fee-basis state or local government official claiming expenses in performing that job.

You are an individual with a disability and are claiming impairment-related work expenses. See Employees with impairment-related work expenses , later. You have travel expenses as a member of the Armed Forces reserves that you can deduct as an adjustment to gross income. You are claiming job-related vehicle, travel, transportation, or non-entertainment meal expenses. See the Instructions for Form for more information.

Use Form , to claim the depreciation deduction for a computer you placed in service after Complete Form , if you are claiming a section deduction. Don't use Form to claim the depreciation deduction for a computer you placed in service before and used only in your home office, unless you are otherwise required to file Form Instead, report the depreciation directly on the appropriate form.

Most of the categories of employees who are able to claim deductions for unreimbursed employees report these deductions as an adjustment to income on Schedule 1 Form or SR , discussed next. However, employees with impairment-related work expenses on Form report these expenses on Schedule A Form or SR. Enter impairment-related work expenses on Form Those employment-related expenses not related to your impairment are a miscellaneous itemized deduction and are no longer deductible.

If you are self-employed, enter your impairment-related work expenses on the appropriate Form Schedule C, E, or F used to report your business income and expenses. You are blind. You must use a reader to do your work. You use the reader both during your regular working hours at your place of work and outside your regular working hours away from your place of work. The reader's services are only for your work. You can deduct your expenses for the reader as impairment-related work expenses.

Most deductible employee business expenses on Form are reported as an adjustment to income on your Schedule 1 Form or SR ; or Form NR. You can deduct certain attorney fees and court costs for unlawful discrimination claims, described earlier, on your Schedule 1 Form or SR ; or Form NR. Debra Smith is an army reservist stationed miles from her home.

She makes this trip once each month. In addition to her travel expenses, she pays for her own uniforms and for the cost of cleaning those uniforms. In addition to her employee business expenses as an army reservist, she has gambling losses from her trips to the casino and race track. Debra completes Form Only the transportation expenses for travel as a reservist are deductible as an adjustment on her Schedule 1 Form or SR.

If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS. Major tax reform legislation impacting individuals, businesses, and tax-exempt entities was approved by Congress in the Tax Cuts and Jobs Act on December 22, Go to IRS. Find free options to prepare and file your return on IRS.

The Tax Counseling for the Elderly TCE program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors. You can go to IRS. Free File. Getting answers to your tax questions. On IRS. You can print the entire interview and the final response for your records. You can also download and view popular tax publications and instructions including the instructions on mobile devices as an eBook at no charge.

Or you can go to IRS. View the amount you owe, pay online, or set up an online payment agreement. The fastest way to receive a tax refund is to combine direct deposit and IRS e-file. Direct deposit securely and electronically transfers your refund directly into your financial account. Eight in 10 taxpayers use direct deposit to receive their refund.

This applies to the entire refund, not just the portion associated with these credits. The quickest way to get a copy of your tax transcript is to go to IRS. If you prefer, you can:. This includes any type of electronic communication, such as text messages and social media channels.

Download the official IRS2Go app to your mobile device to check your refund status. The IRS uses the latest encryption technology to ensure your electronic payments are safe and secure. You can make electronic payments online, by phone, and from a mobile device using the IRS2Go app. Paying electronically is quick, easy, and faster than mailing in a check or money order. IRS Direct Pay : Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you.

Debit or credit card: Choose an approved payment processor to pay online, by phone, and by mobile device. Electronic Funds Withdrawal: Offered only when filing your federal taxes using tax return preparation software or through a tax professional.

Enrollment is required. Check or money order: Mail your payment to the address listed on the notice or instructions. Cash: You may be able to pay your taxes with cash at a participating retail store. Apply for an online payment agreement IRS. Once you complete the online process, you will receive immediate notification of whether your agreement has been approved. Please note that it can take up to 3 weeks from the date you mailed your amended return for it to show up in our system and processing it can take up to 16 weeks.

Keep in mind, many questions can be answered on IRS. Before you visit, go to IRS. Taxpayers can find information on IRS. Spanish IRS. Chinese IRS. Vietnamese IRS. Korean IRS. Russian IRS. The IRS TACs provide over-the-phone interpreter service in over languages, and the service is available free to taxpayers. Their job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights.

Go to TaxpayerAdvocate. These are your rights. Know them. Use them. And their service is free. If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:. You can also call them at TAS works to resolve large-scale problems that affect many taxpayers.

If you know of one of these broad issues, please report it to them at IRS. TAS also has a website, Tax Reform Changes , which shows you how the new tax law may change your future tax filings and helps you plan for these changes. The information is categorized by tax topic in the order of the IRS Form Go to TaxChanges.

LITCs represent individuals whose income is below a certain level and need to resolve tax problems with the IRS, such as audits, appeals, and tax collection disputes. In addition, clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language.

Services are offered for free or a small fee. To find a clinic near you, visit TaxpayerAdvocate. Ordering forms and publications. Tax questions. Qualified performing artist. Fee-basis state or local government official. Employee with impairment-related work expenses.

Educator Expenses Eligible educator. Qualified expenses. Dues used for lobbying. Bonds acquired before October 23, Deduction for excess premium. More information. Slot machines. Racing horse, harness, dog, etc. Home Office Principal place of business. Form Employees with impairment-related work expenses.

Schedule 1 Form or SR Educator expenses. Unlawful discrimination claims. Preparing and filing your tax return. Getting tax forms and publications. Access your online account individual taxpayers only. Using direct deposit. Delayed refund for returns claiming certain credits. Getting a transcript or copy of a return.

Using online tools to help prepare your return. Resolving tax-related identity theft issues. Checking on the status of your refund. Making a tax payment. Checking the status of an amended return. Understanding an IRS notice or letter. Contacting your local IRS office. Watching IRS videos. Getting tax information in other languages. Publication - Introductory Material. Deductions for Unreimbursed Employee Expenses. Expenses you can't deduct.

Expenses you can deduct. How to report your deductions. Comments and suggestions. Publication - Main Contents. Armed Forces reservists. Qualified performing artists. Fee-basis state or local government officials. Paid or incurred during your tax year, For carrying on your trade or business of being an employee, and Ordinary and necessary. Categories of Employment. Armed Forces reservist member of a reserve component.

For more information on travel expenses, see Pub. Educator Expenses. Eligible educator. Nontaxable qualified state tuition program earnings. Nontaxable earnings from Coverdell education savings accounts.

Appraisal fees for a casualty loss or charitable contribution. Casualty and theft losses from property used in performing services as an employee. Clerical help and office rent in caring for investments. Credit or debit card convenience fees. Depreciation on home computers used for investments.

Fees to collect interest and dividends. Hobby expenses, but generally not more than hobby income. Indirect miscellaneous deductions from pass-through entities. Investment fees and expenses. Legal fees related to producing or collecting taxable income or getting tax advice. Loss on deposits in an insolvent or bankrupt financial institution. Repayments of income. Repayments of social security benefits. Safe deposit box rental, except for storing jewelry and other personal effects.

Service charges on dividend reinvestment plans. Tax advice fees. Trustee's fees for your IRA, if separately billed and paid. Appraisal Fees. Casualty and Theft Losses. Clerical Help and Office Rent. Credit or Debit Card Convenience Fees. Depreciation on Home Computer. Excess Deductions of an Estate. Fees To Collect Interest and Dividends. Fines or Penalties.

Certain amounts that constitute restitution. Certain amounts paid to come into compliance with the law. Amounts paid or incurred for taxes due. Hobby Expenses. Indirect Deductions of Pass-Through Entities. Nonpublicly offered mutual funds. Investment Fees and Expenses. Legal Expenses. Loss on Deposits.

Loss on IRA. Repayments of Income. Repayments of Social Security Benefits. Safe Deposit Box Rent. Service Charges on Dividend Reinvestment Plans. Holding shares acquired through a plan, Collecting and reinvesting cash dividends, and Keeping individual records and providing detailed statements of accounts. Tax Preparation Fees. List of Nondeductible Expenses. Adoption expenses. Broker's commissions. Burial or funeral expenses, including the cost of a cemetery lot.

Campaign expenses. Capital expenses. Check-writing fees. Club dues. Commuting expenses. Fees and licenses, such as car licenses, marriage licenses, and dog tags. Fines or penalties. Health spa expenses. Home repairs, insurance, and rent. Home security system. Investment-related seminars. Life insurance premiums paid by the insured. Lobbying expenses. Losses from the sale of your home, furniture, personal car, etc.

Lost or misplaced cash or property. Lunches with co-workers. Meals while working late. Medical expenses as business expenses other than medical examinations required by your employer. Personal disability insurance premiums. Personal legal expenses. Personal, living, or family expenses. Political contributions.

Professional accreditation fees. Professional reputation, expenses to improve. Relief fund contributions. Residential telephone line. Stockholders' meeting, expenses of attending. Exclude from your gross income interest on frozen deposits. A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because:. The state in which the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent.

The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of:. The net amount you withdrew from these deposits during the year, and. The amount you could have withdrawn as of the end of the year not reduced by any penalty for premature withdrawals of a time deposit.

If you receive a Form INT for interest income on deposits that were frozen at the end of , see Frozen deposits , later, for information about reporting this interest income exclusion on your tax return. The interest you exclude is treated as credited to your account in the following year.

You must include it in income in the year you can withdraw it. If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. The defaulted or unpaid interest is not income and is not taxable as interest if paid later. When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. Interest that accrues after the date of purchase, however, is taxable interest income for the year received or accrued.

If you make a below-market gift or demand loan, you must report as interest income any forgone interest defined later from that loan. The below-market loan rules and exceptions are described in this section. For more information, see section of the Internal Revenue Code and its regulations. If you receive a below-market loan, you may be able to deduct the forgone interest as well as any interest you actually paid, but not if it is personal interest.

Certain loans made to qualified continuing care facilities under a continuing care contract. A pay-related loan is any below-market loan between an employer and an employee or between an independent contractor and a person for whom the contractor provides services. A tax avoidance loan is any below-market loan where the avoidance of federal tax is one of the main purposes of the interest arrangement. The amount of interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus.

The rules that apply to a below-market loan depend on whether the loan is a gift loan, demand loan, or term loan. A gift loan is any below-market loan where the forgone interest is in the nature of a gift. A demand loan is a loan payable in full at any time upon demand by the lender. A demand loan is a below-market loan if no interest is charged or if interest is charged at a rate below the applicable federal rate.

A demand loan or gift loan that is a below-market loan generally is treated as an arm's-length transaction in which the lender is treated as having made:. A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and.

An additional payment to the borrower in an amount equal to the forgone interest. The borrower generally is treated as transferring the additional payment back to the lender as interest. The lender must report that amount as interest income. The lender's additional payment to the borrower is treated as a gift, dividend, contribution to capital, pay for services, or other payment, depending on the substance of the transaction. The borrower may have to report this payment as taxable income, depending on its classification.

A term loan is any loan that is not a demand loan. A term loan is a below-market loan if the amount of the loan is more than the present value of all payments due under the loan. A lender who makes a below-market term loan other than a gift loan is treated as transferring an additional lump-sum cash payment to the borrower as a dividend, contribution to capital, etc.

The amount of this payment is the amount of the loan minus the present value, at the applicable federal rate, of all payments due under the loan. An equal amount is treated as original issue discount OID. The lender must report the annual part of the OID as interest income. The borrower may be able to deduct the OID as interest expense. This exception applies only to:. Gift loans between individuals if the gift loan is not directly used to buy or carry income-producing assets, and.

Pay-related loans or corporation-shareholder loans if the avoidance of federal tax is not a principal purpose of the interest arrangement. This exception does not apply to a term loan described in 2 earlier that previously has been subject to the below-market loan rules. Loans to qualified continuing care facilities under continuing care contracts are not subject to the rules for below-market loans for the calendar year if the lender or the lender's spouse is age 62 or older at the end of the year.

For the definitions of qualified continuing care facility and continuing care contract, see Internal Revenue Code section h. Loans are excluded from the below-market loan rules if their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. These loans include:. Loans made available by the lender to the general public on the same terms and conditions that are consistent with the lender's customary business practice;.

Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public;. Certain loans from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Other loans on which the interest arrangement can be shown to have no significant effect on the federal tax liability of the lender or the borrower.

For a loan described in 6 above, all the facts and circumstances are used to determine if the interest arrangement has a significant effect on the federal tax liability of the lender or borrower. Some factors to be considered are:. If you structure a transaction to meet this exception and one of the principal purposes of that structure is the avoidance of federal tax, the loan will be considered a tax-avoidance loan, and this exception will not apply.

This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement. This section provides tax information on U. It explains how to report the interest income on these bonds and how to treat transfers of these bonds. For information about U. Also, go to www. If you use an accrual method of accounting, you must report interest on U. You cannot postpone reporting interest until you receive it or until the bonds mature. If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U.

But see Reporting options for cash method taxpayers , later. These bonds were issued at face value. Interest is paid twice a year by direct deposit to your bank account. If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it.

Series HH bonds were first offered in and last offered in August Before , Series H bonds were issued. Series H bonds are treated the same as Series HH bonds. If you are a cash method taxpayer, you must report the interest when you receive it. Series H bonds have a maturity period of 30 years. Series HH bonds mature in 20 years. The last Series H bonds matured in The last Series HH bonds will mature in Interest on these bonds is payable when you redeem the bonds.

The difference between the purchase price and the redemption value is taxable interest. Series EE bonds were first offered in January and have a maturity period of 30 years. Before July , Series E bonds were issued. The original year maturity period of Series E bonds has been extended to 40 years for bonds issued before December and 30 years for bonds issued after November Paper Series EE bonds are issued at a discount.

The face value is payable to you at maturity. Electronic Series EE bonds are issued at their face value. The face value plus accrued interest is payable to you at maturity. As of January 1, , paper savings bonds are no longer sold at financial institutions. Owners of paper Series EE bonds can convert them to electronic bonds. These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price with accrued interest.

Series I bonds were first offered in These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. The face value plus all accrued interest is payable to you at maturity. If you use the cash method of reporting income, you can report the interest on Series EE, Series E, and Series I bonds in either of the following ways.

Method 1. Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature. However, see Savings bonds traded , later. Series EE bonds issued in matured in If you have used method 1, you generally must report the interest on these bonds on your return. The last Series E bonds were issued in and matured in If you used method 1, you generally should have reported the interest on these bonds on your return.

Method 2. Choose to report the increase in redemption value as interest each year. If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. If you plan to cash your bonds in the same year you will pay for higher education expenses, you may want to use method 1 because you may be able to exclude the interest from your income.

To learn how, see Education Savings Bond Program , later. If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. In the year of change, you must report all interest accrued to date and not previously reported for all your bonds.

Once you choose to report the interest each year, you must continue to do so for all Series EE, Series E, and Series I bonds you own and for any you get later, unless you request permission to change, as explained next. To change from method 2 to method 1, you must request permission from the IRS. Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements.

It includes the year of change both the beginning and ending dates. It identifies the savings bonds for which you are requesting this change. Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and.

Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years. You must attach this statement to your tax return for the year of change, which you must file by the due date including extensions.

You can have an automatic extension of 6 months from the due date of your return for the year of change excluding extensions to file the statement with an amended return. On the statement, type or print "Filed pursuant to section See also Revenue Procedure , Section 6. Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form In that case, follow the form instructions for an automatic change.

No user fee is required. If you used your funds to buy the bond, you must pay the tax on the interest. This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Under these circumstances, the co-owner who redeemed the bond will receive a Form INT at the time of redemption and must provide you with another Form INT showing the amount of interest from the bond taxable to you. The co-owner who redeemed the bond is a "nominee. If you and the other co-owner each contribute part of the bond's purchase price, the interest generally is taxable to each of you, in proportion to the amount each of you paid.

If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. If you file separate returns, each of you generally must report one-half of the bond interest. For more information about community property, see Pub. These rules are also shown in Table If the bonds are Series EE, Series E, or Series I bonds, the interest on the bonds is income to your child in the earlier of the year the bonds are cashed or disposed of or the year the bonds mature, unless your child chooses to report the interest income each year.

The choice to report the accrued interest each year can be made either by your child or by you for your child. This choice is made by filing an income tax return that shows all the interest earned to date, and by stating on the return that your child chooses to report the interest each year.

Either you or your child should keep a copy of this return. Unless your child is otherwise required to file a tax return for any year after making this choice, your child does not have to file a return only to report the annual accrual of U. However, see Tax on unearned income of certain children , earlier, under General Information. Neither you nor your child can change the way you report the interest unless you request permission from the IRS, as discussed earlier under Change from method 2.

If you bought Series E, Series EE, or Series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported.

But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. This same rule applies when bonds other than bonds held as community property are transferred between spouses or incident to divorce.

You bought Series EE bonds entirely with your own funds. You did not choose to report the accrued interest each year. Later, you transfer the bonds to your former spouse under a divorce agreement. You must include the deferred accrued interest, from the date of the original issue of the bonds to the date of transfer, in your income in the year of transfer.

Your former spouse includes in income the interest on the bonds from the date of transfer to the date of redemption. If you and a co-owner each contributed funds to buy Series E, Series EE, or Series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported.

The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. But the new co-owner will report only his or her share of the interest earned after the transfer.

If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued. The bond was issued to you and your spouse as co-owners. You both postpone reporting interest on the bond. At that time neither you nor your spouse has to report the interest earned to the date of reissue.

You both postponed reporting interest on the bond. You must report half the interest earned to the date of reissue. If you own Series E, Series EE, or Series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it.

However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. See Savings bonds traded , later. The manner of reporting interest income on Series E, Series EE, or Series I bonds, after the death of the owner decedent , depends on the accounting and income-reporting methods previously used by the decedent.

If the bonds transferred because of death were owned by a person who used an accrual method, or who used the cash method and had chosen to report the interest each year, the interest earned in the year of death up to the date of death must be reported on that person's final return. The person who acquires the bonds includes in income only interest earned after the date of death. If the transferred bonds were owned by a decedent who had used the cash method and had not chosen to report the interest each year, and who had bought the bonds entirely with his or her own funds, all interest earned before death must be reported in one of the following ways.

The surviving spouse or personal representative executor, administrator, etc. The person who acquires the bonds then includes in income only interest earned after the date of death. If the choice in 1 is not made, the interest earned up to the date of death is income in respect of the decedent and should not be included in the decedent's final return. All interest earned both before and after the decedent's death except any part reported by the estate on its income tax return is income to the person who acquires the bonds.

If that person uses the cash method and does not choose to report the interest each year, he or she can postpone reporting it until the year the bonds are cashed or disposed of or the year they mature, whichever is earlier. In the year that person reports the interest, he or she can claim a deduction for any federal estate tax paid on the part of the interest included in the decedent's estate.

For more information on income in respect of a decedent, see Pub. You are a cash method taxpayer and do not choose to report the interest each year as it is earned. You were the beneficiary of these bonds. Your aunt used the cash method and did not choose to report the interest on the Series EE bonds each year as it accrued. Your aunt's executor chose not to include any interest earned before your aunt's death on her final return.

The income in respect of the decedent is the sum of the unreported interest on the Series EE bonds and the interest, if any, payable on the Series HH bonds but not received as of the date of your aunt's death. You must report any interest received during the year as income on your return. The part of the interest payable but not received before your aunt's death is income in respect of the decedent and may qualify for the estate tax deduction.

For information on when to report the interest on the Series EE bonds traded, see Savings bonds traded , later. Savings bonds distributed from a retirement or profit-sharing plan. If you acquire a U. When you redeem the bond whether in the year of distribution or later , your interest income includes only the interest accrued after the bond was distributed.

To figure the interest reported as a taxable distribution and your interest income when you redeem the bond, see Worksheet for savings bonds distributed from a retirement or profit-sharing plan , later. If you postponed reporting the interest on your Series EE or Series E bonds, you did not recognize taxable income when you traded the bonds for Series HH or Series H bonds, unless you received cash in the trade.

After August 31, , you cannot trade any other series of bonds for Series HH bonds. Any cash you received is income up to the amount of the interest earned on the bonds traded. When your Series HH or Series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. Your cost is the sum of the amount you paid for the traded Series EE or Series E bonds plus any amount you had to pay at the time of the trade.

You could have chosen to treat all of the previously unreported accrued interest on Series EE or Series E bonds traded for Series HH bonds as income in the year of the trade. If you made this choice, it is treated as a change from method 1. See Change from method 1 , earlier. Box 3 of your Form INT should show the interest as the difference between the amount you received and the amount paid for the bond. However, your Form INT may show more interest than you have to include on your income tax return.

For example, this may happen if any of the following are true. You chose to report the increase in the redemption value of the bond each year. The interest shown on your Form INT will not be reduced by amounts previously included in income. You received the bond from a decedent. The interest shown on your Form INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return. Ownership of the bond was transferred.

The interest shown on your Form INT will not be reduced by interest that accrued before the transfer. You were named as a co-owner, and the other co-owner contributed funds to buy the bond. The interest shown on your Form INT will not be reduced by the amount you received as nominee for the other co-owner. See Co-owners , earlier, for more information about the reporting requirements.

You received the bond in a taxable distribution from a retirement or profit-sharing plan. The interest shown on your Form INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. For more information on including the correct amount of interest on your return, see U.

Do not include this income on your state or local income tax return. You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. This exclusion is known as the Education Savings Bond Program. Use Form to figure your exclusion. Attach the form to your Form or SR. A qualified U.

The bond must be issued either in your name sole owner or in your and your spouse's names co-owners. You must be at least 24 years old before the bond's issue date. For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased. You can designate any individual including a child as a beneficiary of the bond.

If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of Treasury. Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent to attend an eligible educational institution.

Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. For information about these programs, see Pub. Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program.

These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the Department of Education. You must reduce your qualified higher educational expenses by all of the following tax-free benefits. Expenses used to figure the tax-free portion of distributions from a Coverdell ESA. Expenses used to figure the tax-free portion of distributions from a qualified tuition program.

Any tax-free payments other than gifts or inheritances received as educational assistance, such as:. Any expense used in figuring the American Opportunity and lifetime learning credits. If the total proceeds interest and principal from the qualified U. If the proceeds are more than the expenses, you may be able to exclude only part of the interest. To determine the excludable amount, multiply the interest part of the proceeds by a fraction. The numerator top part of the fraction is the qualified higher educational expenses you paid during the year.

The denominator bottom part of the fraction is the total proceeds you received during the year. They are not claiming an education credit for that amount, and their daughter does not have any tax-free educational assistance. Figuring the interest part of the proceeds Form , line 6. To figure the interest to report on Form , line 6, use the Line 6 Worksheet in the Form instructions.

If you previously reported any interest from savings bonds cashed during , use the Alternate Line 6 Worksheet below instead. The interest exclusion is limited if your modified adjusted gross income modified AGI is:. You do not qualify for the interest exclusion if your modified AGI is equal to or more than the upper limit for your filing status.

Modified AGI, for purposes of this exclusion, is adjusted gross income Form or SR, line 8b figured before the interest exclusion, and modified by adding back any:. Exclusion for adoption benefits received under an employer's adoption assistance program,. If you claim any of the exclusion or deduction items listed above except items 6, 7, and 8 , add the amount of the exclusion or deduction except items 6, 7, and 8 to the amount on line 5 of the worksheet, and enter the total on Form , line 9, as your modified AGI.

Because the deduction for interest expenses due to royalties and other investments is limited to your net investment income see Investment Interest in chapter 3 , you cannot figure the deduction for interest expenses until you have figured this exclusion of savings bond interest.

Therefore, if you had interest expenses due to royalties deductible on Schedule E Form or SR , Supplemental Income and Loss, you must make a special computation of your deductible interest to figure the net royalty income included in your modified AGI. You must figure deductible interest without regard to this exclusion of bond interest.

You can use a "dummy" Form , Investment Interest Expense Deduction, to make the special computation. On this form, include in your net investment income your total interest income for the year from Series EE and I U. Use the deductible interest amount from this form only to figure the net royalty income included in your modified AGI. Do not attach this form to your tax return. After you figure this interest exclusion, use a separate Form to figure your actual deduction for investment interest expenses and attach that form to your return.

If you claim the interest exclusion, you must keep a written record of the qualified U. Your record must include the serial number, issue date, face value, and total redemption proceeds principal and interest of each bond. You can use Form to record this information. You also should keep bills, receipts, canceled checks, or other documentation that shows you paid qualified higher educational expenses during the year.

Interest income from Treasury bills, notes, and bonds is subject to federal income tax but is exempt from all state and local income taxes. You should receive Form INT showing the interest in box 3 paid to you for the year.

These bills generally have a 4-week, week, week, or week maturity period. The difference between the discounted price you pay for the bills and the face value you receive at maturity is interest income. Generally, you report this interest income when the bill is paid at maturity.

If you paid a premium for a bill more than face value , you generally report the premium as a section deduction when the bill is paid at maturity. See Discount on Short-Term Obligations , later. If you reinvest your Treasury bill at its maturity in a new Treasury bill, note, or bond, you will receive payment for the difference between the proceeds of the maturing bill par amount less any tax withheld and the purchase price of the new Treasury security.

However, you must report the full amount of the interest income on each of your Treasury bills at the time it reaches maturity. Treasury notes have maturity periods of more than 1 year, ranging up to 10 years. Maturity periods for Treasury bonds are longer than 10 years. Generally, you report this interest for the year paid. When the notes or bonds mature, you can redeem these securities for face value or use the proceeds from the maturing note or bond to reinvest in another note or bond of the same type and term.

If you do nothing, the proceeds from the maturing note or bond will be deposited in your bank account. Treasury notes and bonds are sold by auction. Two types of bids are accepted: competitive bids and noncompetitive bids. If you make a competitive bid and a determination is made that the purchase price is less than the face value, you will receive a refund for the difference between the purchase price and the face value. This amount is considered original issue discount. See De minimis OID , later.

If the purchase price is determined to be more than the face amount, the difference is a premium. See Bond Premium Amortization in chapter 3. Or, on the Internet, visit www. These securities pay interest twice a year at a fixed rate, based on a principal amount adjusted to take into account inflation and deflation.

For the tax treatment of these securities, see Inflation-Indexed Debt Instruments , later. For information on the retirement, sale, or redemption of U. Also, see Nontaxable Trades in chapter 4 for information about trading U. Treasury obligations for certain other designated issues.

If you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale. You must report that part of the sales price as interest income for the year of sale. If you buy a bond between interest payment dates, part of the purchase price represents interest accrued before the date of purchase. When that interest is paid to you, treat it as a return of your capital investment, rather than interest income, by reducing your basis in the bond.

See Accrued interest on bonds , later in this chapter, for information on reporting the payment. Life insurance proceeds paid to you as the beneficiary of the insured person usually are not taxable. But if you receive the proceeds in installments, you usually must report part of each installment payment as interest income. If you leave life insurance proceeds on deposit with an insurance company under an agreement to pay interest only, the interest paid to you is taxable.

If you buy an annuity with life insurance proceeds, the annuity payments you receive are taxed as pension and annuity income from a nonqualified plan, not as interest income. Interest you receive on an obligation issued by a state or local government generally is not taxable. The issuer should be able to tell you whether the interest is taxable. The issuer also should give you a periodic or year-end statement showing the tax treatment of the obligation.

If you invested in the obligation through a trust, a fund, or other organization, that organization should give you this information. Even if interest on the obligation is not subject to income tax, you may have to report a capital gain or loss when you sell it. Estate, gift, or generation-skipping tax may apply to other dispositions of the obligation.

Interest on a bond used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a U. Political subdivisions include:. There are other requirements for tax-exempt bonds. Contact the issuing state or local government agency or see sections and through of the Internal Revenue Code and the related regulations.

Obligations that are not bonds. Interest on a state or local government obligation may be tax exempt even if the obligation is not a bond. For example, interest on a debt evidenced only by an ordinary written agreement of purchase and sale may be tax exempt. Also, interest paid by an insurer on default by the state or political subdivision may be tax exempt. A bond issued after June 30, , generally must be in registered form for the interest to be tax exempt.

Bonds issued after by an Indian tribal government including tribal economic development bonds issued after February 17, are treated as issued by a state. Interest on these bonds generally is tax exempt if the bonds are part of an issue of which substantially all proceeds are to be used in the exercise of any essential government function. However, the essential government function requirement does not apply to tribal economic development bonds issued after February 17, , for tax-exempt treatment.

Interest on private activity bonds other than certain bonds for tribal manufacturing facilities is taxable. Original issue discount OID on tax-exempt state or local government bonds is treated as tax-exempt interest. For information on the treatment of OID when you dispose of a tax-exempt bond, see Tax-exempt state and local government bonds , later.

For special rules that apply to stripped tax-exempt obligations, see Stripped Bonds and Coupons , later. If you must file a tax return, you are required to show any tax-exempt interest you received on your return. This is an information reporting requirement only. It does not change tax-exempt interest to taxable interest. See Reporting tax-exempt interest , later in this chapter.

Interest on federally guaranteed state or local obligations issued after generally is taxable. This rule does not apply to interest on obligations guaranteed by the following U. Federal home loan banks. The guarantee must be made after July 30, , in connection with the original bond issue during the period beginning on July 30, , and ending on December 31, or a renewal or extension of a guarantee so made and the bank must meet safety and soundness requirements.

Tax credit bonds generally do not pay interest. Instead, the bondholder is allowed an annual tax credit. The credit compensates the holder for lending money to the issuer and functions as interest paid on the bond. Use Form , Credit to Holders of Tax Credit Bonds, to claim the credit for the following tax credit bonds and to figure the amount of the credit to report as interest income.

The proceeds of these bonds are used to finance mortgage loans for homebuyers. Generally, interest on state or local government home mortgage bonds issued after April 24, , is taxable unless the bonds are qualified mortgage bonds or qualified veterans' mortgage bonds.

Interest on arbitrage bonds issued by state or local governments after October 9, , is taxable. An arbitrage bond is a bond any portion of the proceeds of which is expected to be used to buy or to replace funds used to buy higher yielding investments. A bond is treated as an arbitrage bond if the issuer intentionally uses any part of the proceeds of the issue in this manner.

Interest on a private activity bond that is not a qualified bond defined below is taxable. Generally, a private activity bond is part of a state or local government bond issue that meets both the following requirements. Secured by an interest in property to be used for a private business use or payments for this property , or. Derived from payments for property or borrowed money used for a private business use.

Interest on a private activity bond that is a qualified bond is tax exempt. A qualified bond is an exempt-facility bond including an enterprise zone facility bond, a New York Liberty bond, a Midwestern disaster area bond, a Hurricane Ike disaster area bond, a Gulf Opportunity Zone bond treated as an exempt-facility bond, or any recovery zone facility bond issued after February 17, , and before January 1, , qualified student loan bond, qualified small issue bond including a tribal manufacturing facility bond , qualified redevelopment bond, qualified mortgage bond including a Gulf Opportunity Zone bond, a Midwestern disaster area bond, or a Hurricane Ike disaster area bond treated as a qualified mortgage bond , qualified veterans' mortgage bond, or qualified c 3 bond a bond issued for the benefit of certain tax-exempt organizations.

Interest you receive on these tax-exempt bonds, if issued after August 7, , generally is a "tax preference item" and may be subject to the alternative minimum tax. See Form and its instructions for more information. The interest on the following bonds is not a tax preference item and is not subject to the alternative minimum tax.

The interest on any qualified bond issued in or is not a tax preference item and is not subject to the alternative minimum tax. For this purpose, a refunding bond whether a current or advanced refunding is treated as issued on the date the refunded bond was issued or on the date the original bond was issued in the case of a series of refundings.

However, this rule does not apply to any refunding bond issued to refund any qualified bond issued during through or after A portion of the interest on specified private activity bonds issued after December 31, , may be a tax preference item subject to the alternative minimum tax. The tax preference status will apply to the portion of the interest that remains after reducing it by deductions that would be allowed if the interest were taxable.

Interest on certain private activity bonds issued by a state or local government to finance a facility used in an empowerment zone or enterprise community is tax exempt. New York Liberty bonds are bonds issued after March 9, , to finance the construction and rehabilitation of real property in the designated "Liberty Zone" of New York City. Interest on these bonds issued before is tax exempt.

Market discount on a tax-exempt bond is not tax exempt. If you bought the bond after April 30, , you can choose to accrue the market discount over the period you own the bond and include it in your income currently as taxable interest. See Market Discount Bonds , later. If you do not make that choice, or if you bought the bond before May 1, , any gain from market discount is taxable when you dispose of the bond. For more information on the treatment of market discount when you dispose of a tax-exempt bond, see Discounted Debt Instruments , later.

A debt instrument, such as a bond, note, debenture, or other evidence of indebtedness, that bears no interest or bears interest at a lower than current market rate usually will be issued at less than its face amount. This discount is, in effect, additional interest income. The following are some types of discounted debt instruments. The discount on these instruments except municipal bonds is taxable in most instances.

The discount on municipal bonds generally is not taxable but see State or Local Government Obligations , earlier, for exceptions. OID is a form of interest. You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer. A debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price at maturity.

OID is the difference between the stated redemption price at maturity and the issue price. All debt instruments that pay no interest before maturity are presumed to be issued at a discount. Zero coupon bonds are one example of these instruments. The OID accrual rules generally do not apply to short-term obligations those with a fixed maturity date of 1 year or less from date of issue.

This small discount is known as "de minimis" OID. In the case of a debt instrument providing for more than one stated principal payment an installment obligation , the "de minimis" formula described above is modified. See Regulations section 1. If you buy a debt instrument with de minimis OID at a premium, the discount is not includible in income. If you buy a debt instrument with de minimis OID at a discount, the discount is reported under the market discount rules.

See Market Discount Bonds , later in this chapter. The OID rules discussed here do not apply to the following debt instruments. Tax-exempt obligations. However, see Stripped tax-exempt obligations , later. Short-term debt instruments those with a fixed maturity date of not more than 1 year from the date of issue. Avoiding any federal tax is not one of the principal purposes of the loan. It also will show, in box 2, the stated interest you must include in your income.

Box 8 shows OID on a U. Treasury obligation for the part of the year you owned it and is not included in box 1. Box 10 shows bond premium amortization. Do not file your copy with your return. Keep it for your records. In most cases, you must report the entire amount in boxes 1, 2, and 8 of Form OID as interest income. If you receive a Form OID that includes amounts belonging to another person, see Nominee distributions , later.

You bought the debt instrument after its original issue and paid a premium or an acquisition premium. The debt instrument is a stripped bond or a stripped coupon including certain zero coupon instruments. See Figuring OID , later in this chapter. You bought a debt instrument at a premium if its adjusted basis immediately after purchase was greater than the total of all amounts payable on the instrument after the purchase date, other than qualified stated interest.

In general, this is stated interest unconditionally payable in cash or property other than debt instruments of the issuer at least annually at a fixed rate. You bought a debt instrument at an acquisition premium if both the following are true. The instrument's adjusted basis immediately after purchase including purchase at original issue was greater than its adjusted issue price.

This is the issue price plus the OID previously accrued, minus any payment previously made on the instrument other than qualified stated interest. Acquisition premium reduces the amount of OID includible in your income. If you disposed of a debt instrument or acquired it from another holder during the year, see Bonds Sold Between Interest Dates , earlier, for information about the treatment of periodic interest that may be shown in box 2 of Form OID for that instrument.

Debt instruments issued after May 27, after July 1, , if a government instrument , and before If you hold these debt instruments as capital assets, you must include a part of the discount in your gross income each year that you own the instruments. Your basis in the instrument is increased by the amount of OID you include in your gross income. For these debt instruments, you report the total OID that applies each year regardless of whether you hold that debt instrument as a capital asset.

If you buy a CD with a maturity of more than 1 year, you must include in income each year a part of the total interest due and report it in the same manner as other OID. This also applies to similar deposit arrangements with banks, building and loan associations, etc. CDs issued after generally must be in registered form. Bearer CDs are CDs not in registered form. They are not issued in the depositor's name and are transferable from one individual to another. This is an arrangement with a fixed maturity date in which you make deposits on a schedule arranged between you and your bank.

But there is no actual or constructive receipt of interest until the fixed maturity date is reached. You must include a part of the interest in your income as OID each year. Each year the bank must give you a Form OID to show you the amount you must include in your income for the year. If, before the maturity date, you redeem a deferred interest account for less than its stated redemption price at maturity, you can deduct OID that you previously included in income but did not receive.

If you renew a CD at maturity, it is treated as a redemption and a purchase of a new certificate. This is true regardless of the terms of renewal. These certificates are subject to the OID rules. They are a form of endowment contracts issued by insurance or investment companies for either a lump-sum payment or periodic payments, with the face amount becoming payable on the maturity date of the certificate. In general, the difference between the face amount and the amount you paid for the contract is OID.

You must include a part of the OID in your income over the term of the certificate. The issuer must give you a statement on Form OID indicating the amount you must include in your income each year. If you hold an inflation-indexed debt instrument other than a Series I U.

In general, an inflation-indexed debt instrument is a debt instrument on which the payments are adjusted for inflation and deflation such as Treasury Inflation-Protected Securities. You should receive Form OID from the payer showing the amount you must report as OID and any qualified stated interest paid to you during the year. For more information, see Pub. If you strip one or more coupons from a bond and sell the bond or the coupons, the bond and coupons are treated as separate debt instruments issued with OID.

The holder of a stripped bond has the right to receive the principal redemption price payment. The holder of a stripped coupon has the right to receive interest on the bond. Instruments backed by U. Treasury securities that represent ownership interests in those securities, such as obligations backed by U. Treasury bonds offered primarily by brokerage firms. If you strip coupons from a bond and sell the bond or coupons, include in income the interest that accrued while you held the bond before the date of sale, to the extent you did not previously include this interest in your income.

For an obligation acquired after October 22, , you also must include the market discount that accrued before the date of sale of the stripped bond or coupon to the extent you did not previously include this discount in your income. Add the interest and market discount that you include in income to the basis of the bond and coupons.

Allocate this adjusted basis between the items you keep and the items you sell, based on the fair market value of the items. The difference between the sale price of the bond or coupon and the allocated basis of the bond or coupon is your gain or loss from the sale. Treat any item you keep as an OID bond originally issued and bought by you on the sale date of the other items. If you keep the bond, treat the amount of the redemption price of the bond that is more than the basis of the bond as OID.

If you keep the coupons, treat the amount payable on the coupons that is more than the basis of the coupons as OID. If you buy a stripped bond or stripped coupon, treat it as if it were originally issued on the date you buy it. If you buy a stripped bond, treat as OID any excess of the stated redemption price at maturity over your purchase price. If you buy a stripped coupon, treat as OID any excess of the amount payable on the due date of the coupon over your purchase price. The rules for figuring OID on stripped bonds and stripped coupons depend on the date the debt instruments were purchased, not the date issued.

OID on stripped inflation-indexed debt instruments is figured under the discount bond method. This method is described in Regulations section 1. You do not have to pay tax on OID on any stripped tax-exempt bond or coupon you bought before June 11, However, if you acquired it after October 22, , you must accrue OID on it to determine its basis when you dispose of it.

See Original issue discount OID on debt instruments , later. You may have to pay tax on part of the OID on stripped tax-exempt bonds or coupons that you bought after June 10, Market discount arises when the value of a debt obligation decreases after its issue date. Generally, this is due to an increase in interest rates.

If you buy a bond on the secondary market, it may have market discount. When you buy a market discount bond, you can choose to accrue the market discount over the period you own the bond and include it in your income currently as interest income. If you do not make this choice, the following rules generally apply.

You must treat any gain when you dispose of the bond as ordinary interest income, up to the amount of the accrued market discount. See Discounted Debt Instruments , later. You must treat any partial payment of principal on the bond as ordinary interest income, up to the amount of the accrued market discount.

See Partial principal payments , later in this discussion. If you borrow money to buy or carry the bond, your deduction for interest paid on the debt is limited. See Limit on interest deduction for market discount bonds , later. Market discount is the amount of the stated redemption price of a bond at maturity that is more than your basis in the bond immediately after you acquire it.

If a market discount bond also has OID, the market discount is the sum of the bond's issue price and the total OID includible in the gross income of all holders for a tax-exempt bond, the total OID that accrued before you acquired the bond, reduced by your basis in the bond immediately after you acquired it. Generally, a bond you acquired at original issue is not a market discount bond.

If your adjusted basis in a bond is determined by reference to the adjusted basis of another person who acquired the bond at original issue, you also are considered to have acquired it at original issue. A bond you acquired at original issue can be a market discount bond if either of the following is true.

The bond is issued in exchange for a market discount bond under a plan of reorganization. This does not apply if the bond is issued in exchange for a market discount bond issued before July 19, , and the terms and interest rates of both bonds are the same. Treat the market discount as accruing in equal daily installments during the period you hold the bond.

Figure the daily installments by dividing the market discount by the number of days after the date you acquired the bond, up to and including its maturity date. Multiply the daily installments by the number of days you held the bond to figure your accrued market discount. Instead of using the ratable accrual method, you can choose to figure the accrued discount using a constant interest rate the constant yield method. Make this choice by attaching to your timely filed return a statement identifying the bond and stating that you are making a constant interest rate election.

The choice takes effect on the date you acquired the bond. If you choose to use this method for any bond, you cannot change your choice for that bond. For information about using the constant yield method, see Constant yield method under Debt Instruments Issued After in Pub. To use this method to figure market discount instead of OID , treat the bond as having been issued on the date you acquired it.

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